A question form Schweser Qbank: Which of the following events is least likely to cause a downward shift in short-run aggregate supply? A) A labor stoppage causes the price of steel to rise. B) Oil exporting countries reduce their production levels. C) Inflation increases from 4% to 7%. The correct answer was C) Inflation increases from 4% to 7%. Changes in the price level represent movement along the short-run aggregate supply curve. The other items listed are events that are likely to shift the short-run aggregate supply curve to the left (decrease SRAS). I can not understand why choice C i correct? what is the concept behind this question?
I’m not really sure how else to spin this answer to you. By process of elimination you should understand the questions A and B are talking about MOVEMENT along the supply curve (changing quantities/levels of production/available labor) while the third is obviously going to have an affect on the entire supply curve. So by that knowledge, without having any other indication of why these variables occur the way they do, you should recognize the key words DOWNWARD SHIFT. Inflation will increase the price of the labour/resource causing the curve to shift to a higher price point and a lower demand equilibrium. Just try to think of it as, inflation increases prices (across the board). When the curve shifts to these new prices it will be met with a decreased demand for the product/service and thus shift to the left (lower demand, higher price). That is the best way I can justify it in my mind. I hope that helps.
Thanks Cfacowtown for the explanation. when the question asking a downward shift in short run aggregate supply, is not that mean a shift to the right (whole the supply curve shifts to the right which means more production with lower price)?
when the question asking a downward shift in short run aggregate supply, is not that mean a shift to the right (whole the supply curve shifts to the right which means more production with lower price)?
I don’t really agree with cfacowtown’s explanation as I think both of you are way overthinking this. The question is which is least likely to cause a reduction in supply. (Note: the question does not ask about a downward shift in the supply curve, but simply a downward shift in supply.) A and B are very likely to reduce supply in the short run. (Though in the long run will cause a leftward shift in the supply curve - not a movement along it.) C is the best answer because inflation has little to no effect on short run supply. Even in the long run, effect wouldn’t be large other than to change the nominal price level as wages would be included in the “across the board” price increases.
Thank you so much Chi Paul I’ve got it